Aon Study Reports Homeowners Marketplace Still Not Earning Its Cost of Capital

October 4, 2002

Aon Corporation announced the results of Aon Re Worldwide’s comprehensive study of the U.S. homeowners marketplace.

The results of the study reveal that the homeowners insurance industry, despite recent rate and underwriting actions, cannot reasonably expect to earn its cost of capital. While the personal lines insurance industry’s cost of capital ranges from 11 percent to 13 percent, the homeowners line after considering rate and underwriting actions filed through May / June 2002 is returning only 4.8 percent on capital. The study also shows that further homeowner rate increases or other underwriting actions may need to be taken by insurers to fully recover the cost of capital.

The study is the first of its kind by Aon Re Worldwide and was undertaken to quantify the economic status of the market given the considerable rate increases and other underwriting changes that have occurred recently. The rate increases follow announcements of poor financial results for significant portions of the homeowners insurance industry that has suffered from catastrophes and tough competition among its carriers. The study also showed that homeowners insurers have made substantial progress from the lowest point in the current homeowners insurance crisis. Aon has developed a suite of tools to help insurers cope with the complex analytics that are now associated with the homeowners line.

The comprehensive study included a review of the rate filings of the top five homeowners insurers in each state for the states that represent 80 percent of the U.S. population. Aon plans semi-annual updates of the study until the market stabilizes.

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